The Best Reasons to take Total Cost of Compensation Seriously
A few weeks ago, I was on a call with a client discussing the concept of Total Cost of Compensation (TCC). The client queried the nature of salary data in one of the tools in SSON Analytics’s portal. The discussion was candid and engaging. We covered a variety of benefits that do not typically show up on salary portals and yet are required for the correct calculation of Total Cost of Compensation. Given how many factors weigh into this calculation, and the propensity to overlook some of them, I wanted to share relevant benefits here.
10 factors that support the calculation of Total Cost of Compensation
- Base pay + Infrastructure cost
- Value of paid leave
- Value of employer-paid portion of insurance plan premiums
- Employer contribution to employee’s retirement plan
- Stock options (rare, in most SSCs)
- Value of Employee Assistance Program
- Annual usage value of employee’s company car and associated benefits (packaged under the cost of living section; only applicable to very senior management)
- Value of any other benefits offered/given (too varied to determine)
- Other one-time benefits at the start of employment (lack of common comparison basis)
From the list, we can observe items which can be broken down into smaller items to consider. Let us review them.
While most people are aware of bonuses, there are a variety of bonuses that apply. For most companies, there are three types of bonuses. The first, and most common, is the performance bonus. The second is the thirteenth-month bonus/annual wage supplement bonus which is common in some countries (this bonus is mandatory in countries such as Brazil and Indonesia). The third is a custom bonus, which is compulsory in some country. For example, in Belgium and Angola, they pay a mandatory Christmas or holiday bonus, on top of thirteenth-month bonuses.
Value of paid leave
Paid leave is something that most managers do not consider as part of their calculation of Total Cost of Compensation. This particular item is highly dependent on both local practices, as well as regulatory practices. In some countries, this component has a significant impact on the cost of running a business, due to the mandatory minimum number of paid leaves and public holidays. For example, in Kuwait, employees enjoy 42 days of paid leave every year.
In the case of a multinational company, it is important to maintain the same number of days of leave across different regions. The leaves include sick leave, annual leave, child care leave and hospitalisation leave. Other ‘unique’ leaves, such as emergency leave or compassionate leave, are not included.
Most companies provide some form of medical benefits and insurance coverage. However, in some countries, these health insurance benefits are mandatory and required for all staff. For example, in China, five types of mandatory employee insurance benefits are paid for by the employer. These include Health insurance, Dental insurance, Vision insurance, Life insurance, Short-term disability insurance, Long-term disability insurance and Retrenchment insurance.
Estimating the cost of insurance is a difficult task. Most health and dental insurance coverage depends on the age distribution of employees, along with pre-existing medical conditions. In addition, for expats, the cost of insurance can be significantly different compared to local insurances.
Employer contributions to employee’s retirement plan
Whether mandated by government or initiated by employers, the value of retirement plans is difficult to assess. Different countries have different policies. In cases where the contributions are to a public pension scheme, the contribution amount is publicly available. For private plans, the contribution schedule is complicated and difficult to compute. This contribution constitutes a major component in the Total Cost of Compensation but is somewhat difficult to assess.
Fortunately, this is not that common and is often excluded in the compensation. This type of benefit is something that cannot be valued easily and depending on the way it is awarded, the benefit conferred will vary.
Value of Employee Assistance Program
Employee Assistance Programs are welfare programs for employees. They include employee counselling and other forms of assistance that support staff suffering from work-related stress and other unpleasant ailments caused by work. The program is designed to assist staff to perform better in their work and support their overall well-being. The value of such programs can be very valuable to employees especially if one is undergoing work related difficulties.
Annual usage value of employee’s company car and associated benefits
This is usually for top management, and is simple to calculate on the basis of the cost of car ownership and maintenance.
Value of any other benefits offered
These ‘other’ benefits are associated with perks such as fitness club membership or discounts, cell phone corporate plans, free or discounted parking facilities and company sponsored discounts. Given that such benefits are not standardised, it can be difficult to assess the contribution to Total Cost of Compensation.
One time benefits
One time benefits are associated with equipment purchases or single event costs. Examples of such costs are relocation benefits or travel benefits.
The concept of Total Cost of Compensation is a complex one with many components. Computing its value for any location or site selection requires careful research and data collection, given the myriad of possibilities. Many of the existing compensation calculations only include salary and medical benefits, which are incomparable and not comprehensive. By contrast, SSON analytics has identified this gap and is working to close it.
SSON Analytics is currently embarking on a data collection project to collate all these data points to facilitate a site selection strategy on the basis of truthful and comprehensive data. In the coming months, our subscribers will be able to access these unique sets of information via the City Cube tool, on our website.